The concept of “fair trade” is somewhat nebulous. Different individuals and interest groups have construed the term in very different ways. One of the most common interpretations of fair trade, however, has involved various organizations that advocate fair trade with respect to various products that are imported from emerging economies. For these groups, fair trade encompasses the equitable treatment of producers and workers in developing countries, focusing primarily on labor protection and sustainable development. For an extra cost, consumers or companies may purchase a certified product that grantees a “living wage” and better working conditions. In recent years, this movement has gained quite a significant following, expanding to cover a wide variety of products, including coffee, cocoa, bananas, and textiles.

Fair trade products, such as coffee, have seen an explosion in popularity.

Fair trade products have seen increasing integration into the global market. Prominent examples include Starbucks and McDonald’s decisions to purchase fair trade coffee, Nestle’s plan to fair trade certify its chocolate, and Ben & Jerry’s ambitious use of fair trade ingredients only. These products have also found their way to store shelves; in the U.S. alone, an estimated 11,000 fair trade products can be found in at least 70,000 stores. In 2010, the products constituted $1.2 billion in retail sales. The fair trade brand can also improve a product’s marketability; the Wall Street Journal reported a study in which “fair trade certified” stickers were attached to coffee products in a select number of stores. As it turns out, the stores which had the labels saw a 13% increase in sales of the product, even when the price of the product was raised by $1 a pound.

There can be little doubt that fair trade products have a certain appeal to consumers, despite their higher costs. But the question must be asked: do fair trade products really help the poor in developing countries? The answer is mixed. For the Salvadorian community of El Guabo, a 600 family farm cooperative that grows bananas, the impact of fair trade has been quite positive. Water quality has drastically improved from a diminished use of chemicals (required for free trade certification), leading to fewer diseases. Social programs, funded by the profits, have given the community improved access to education, healthcare, and conservation.

The movement has also made commendable progress on the issue of gender equality. In many of the countries fair trade is involved in, women face many instances of unequal treatment, discrimination, and harassment. In response, the fair trade movement actively seeks to give women an opportunity to work in non-discriminatory environment. The response has been positive: women hold many leadership roles in many of the cooperatives. In many networks, women represent over 60% of the workforce, working as artisans, farmers, traders, academicians, and professionals. Specialty groups have emerged such as SAME SKY, a fair trade group that makes jewelry, exclusively employing HIV-positive women who were victims of sexual violence during the Rwandan Genocide.

At first glance, fair trade may seem to be a win-win scenario for producers and consumers. A more in-depth examination, however, reveals that there are some distinct drawbacks to fair trade practices. In order to receive fair trade certification, the parties receiving the endorsement, must be a member of a cooperative. Individual farmers and corporations are excluded. The certification process is somewhat expensive: an average-sized organization will pay about $3,300 to apply for the certification and about $1,300 to $2,200 for a biennial renewal. This excludes the infrastructure and labor costs to comply with fair trade standards. Consequentially, the overhead costs diminish the returns: less than 25% of fair trade premiums return to the producers.

While many of the rules and regulations perpetrated by fair trade agreements have sound principles behind them, enforcement of the rules can be somewhat elusive. Although fair trade producers are supposed to adhere to the most stringent environmental standards, they are not always met: an estimated one-fifth of fair trade coffee has been found illegally planted in virgin rainforests. Labor conditions for workers have also been problematic. Because the agreements are made between the cooperatives and the fair trade organizations, the workers that harvest the products are not always afforded adequate protection. In Peru, fair trade coffee growers were caught underpaying seasonal workers. In Burkina Fasno, a fair trade cotton supplier for Victoria’s Secret was found exploiting child labor, a direct violation of the agreement. Undoubtedly, many other scandals within the fair trade movement have yet to see the light of day.

Is it really misanthropic to not buy fair trade products?

But the biggest losers are the farmers excluded from fair trade labeling. As previously mentioned, farmers cannot receive certification unless they organize into larger cooperatives. The farmers unable to gain certification are left with a stigmatized brand, giving them a competitive disadvantage. This has been particularly problematic given that fair trade agreements are primarily given to middle income countries. The top four countries (Mexico, Columbia, Peru, and South Africa) have an average GDP per capita of $4790. By contrast, the 13 nations with only one fair trade producer have a GDP per capita of $2,807. The phenomena is compounded by the “Honeypot Effect:” it is tempting for governments, NGOs, and private organizations to give financial support to fair trade cooperatives that are already well managed. Focusing resources in such places may produce immediate results, but it does divert assistance away from the farmers with greater needs outside the cooperatives.

Altruistic as their motives may be, the fair trade movement has not produced entirely uniform benefits for producers and farmers in developing countries. Whether the costs outweigh the benefits remains to be seen.

The Center for Global Prosperity is focused on educating policy leaders and the general public on the crucial role of the private sector (both non and for profit) as a source of economic growth and prosperity around the world. To accomplish this central mission, the Center produces The Index of Global Philanthropy and Remittances, which identifies the sources and amounts of private giving around the world and The Index of Philanthropic Freedom, which identifies the barriers and incentives to private giving in 64 countries.